Unpack the role of the Federal Reserve in Keynesian Economics? Answer each question below in your responses. - What is money?
- What are the functions of money?
- What is the Fed’s primary responsibility?
- What are the four tools of the Fed? How do they work?
- Assuming the Federal Reserve wanted to try and stimulate the economy, what would it do? Why?
- What are the limitations of monetary policy and what variables, according to your Keynesian Cross model in Q3, that drive that/those limitation(s)?
- Can the Federal Reserve ever run out of U. S. Dollars? Defend your answer.

What is money?

Money is the good that in a economy serves the three function of money, as simple as that. It can be in the form of paper currency, gold, silver, even tobacco, like in early colonial Virginia, but as long as it fulfills the three functions, it is money.

What are the functions of money?

Medium of exchange, unit of account, and store of value.

What is the Fed’s primary responsibility?

To control the money supply in order to maintain the value of the currency within a stable range, in other words, to control inflation.

What are the four tools of the Fed? How do they work?

Open market operations - the Fed buys and sells government bonds in the open market.

Discount rate - the Fed rises or lowers the rate at which it lends money to commercial banks.

Reserve requirements - the Fed rises or lowers the amount of money that commercial banks must reserve as a percentage of the total amount of money that they hold.

Interest on reserves - the Fed pays interest on excess reserves to commercial banks when it wants to contract the money supply.

Assuming the Federal Reserve wanted to try and stimulate the economy, what would it do? Why?

It would employ expansionary monetary policy: buy more government bonds in order to expand the monetary base, and lower the discount rate and the reserve requirements.

The reason is that a higher money supply makes investment cheaper, because all the interests rates in the economy go down. This in turn stimulates economic growth.

What are the limitations of monetary policy and what variables, according to your Keynesian Cross model in Q3, that drive that/those limitation(s)?

The limitation, according to the Keynesian Cross model, is that money does not directly influence the level of consumption in an economy (which is the most important component of the aggregate demand).

Can the Federal Reserve ever run out of U.S. Dollars?

No, the Fed can, in theory, print an infinite amount of U.S. Dollars, the problem is that doing so would result in hyperinflation, destroying the economy of the United States in such a case.

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